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Hong Kong, Singapore Provide
Safe Havens as Markets Tumble

By

Jason Booth Staff Reporter of The Wall Street Journal

Updated Oct. 13, 2000 12:01 a.m. ET

Where is an investor to hide when the sky is falling?

Across the region, markets have tumbled to levels not seen, in some cases, since the economic crisis of 1997-98. Partly that's the impact of the sharp decline in the Nasdaq Composite Index in the U.S. But more substantially, negative earnings warnings in the U.S. are raising the specter of similar corporate disappointments in Asia.

And according to some strategists, things could get worse before they get better. "We are in a blind alley. If I was a fund manager I'd be feeling sick," says Han Ong, regional strategist for Salomon Smith Barney. Because most Asian companies report earnings every half year rather than every quarter, a clearer picture of profitability won't emerge for months, Mr. Ong says. And when its does, the news could be bad.

"Analysts will probably start revising down their earnings forecasts shortly before the end of the year," he says. "They should be doing so now."

For investors, the first piece of advice from analysts is to sit tight. Stocks have fallen so far that it doesn't make much sense to sell at current levels.

Then as they wait for market conditions to improve, investors should be focusing on Asia's classic safe havens, Hong Kong, Singapore and even Australia.

Both Hong Kong and Singapore are so cheap that it is unlikely they will fall much further. Singapore's current average price/earnings ratio of 18 compares with a five-year average multiple of 21 for that market. The city-state's earnings outlook also is expected to be robust. According to I/B/E/S, analysts see Singapore-listed companies registering an average revenue growth of 34% in 2000.

Hong Kong isn't so cheap in terms of valuations, but it does have the advantage of doing much of its business in China, so its economy is less dependent on the U.S. Chinese stocks have actually traded higher in recent weeks despite the bloodletting in other markets. And the Chinese economy is one of the few in the region that isn't expected to slow next year.

Another advantage of both Hong Kong and Singapore is their large and stable financial sectors. Not only will strong banks cushion the impact of financial instability elsewhere in the region, they also could prove to be one of the strongest stock-market sectors in coming months.

The prevailing view among analysts is that an economic slowdown in the U.S. will prompt the U.S. Federal Reserve to cut interest rates. Lower interest rates would be particularly good for Hong Kong, where the currency is pegged to the U.S. dollar, because it would prompt domestic rates to also fall. That could spur borrowing from the banks and increase investment in the local real-estate market.

In Merrill Lynch's monthly investors survey, fund managers were more bullish on financial stocks than any other sector in Asia, largely because of optimism over Hong Kong and Singaporean banks.

The same survey showed a steep improvement in sentiment toward Singapore, with bulls heavily outweighing bears. Fund managers have been net buyers in the market for the past three months, the longest net positive run since early 1999.

Not everyone, though, is a believer in Singapore's story. Sadiq Currimbhoy, regional strategist at Merrill Lynch, points out that Singapore has a substantial chemical sector, which could suffer from high oil prices, and is also a big player in the troubled semiconductor sector. "Singapore may not be the growth-defensive play people think it is," he warns.

Then there is Australia. The All Ordinaries index is light on technology plays at a time when technology is very much out of favor. It is, however, heavy on commodities, particularly metals, at a time when base-metal prices are on the rise. As such, the index is still up slightly from the start of the year.

Meanwhile, the Australian dollar has lost around 20% of its value so far this year. Analysts say it isn't hard to expect the currency to make some kind of recovery in coming months, giving an added boost to stocks held by overseas investors.

While investors are advised to seek safe havens in the near term, they should remember that even the most pessimistic analysts see market conditions improving by year end. And given the massive sell-off since the start of the year, quick profits could be made in bombed-out markets such as South Korea and Taiwan. In the words of Anand Aithal, regional strategist at Goldman Sachs, you want to keep a foot in both the defensive and technology camps. He sees Taiwanese semiconductor stocks as good bets once the current downturn in chip prices starts to flatten out.

Mr. Currimbhoy at Merrill, along with a number of other analysts, likes Korean mobile telecommunications stocks, which he says look cheap relative to their industry peers following their recent sell-offs. Indeed, telecommunications stocks have managed to outperform most other sectors over the past week.

Yet before any sustained tech rebound happens in Asia, the Nasdaq will have to regain its health. While that tech-heavy index may find some support around the 3000-point level (it was down to 3,107.73 Thursday afternoon), many analysts believe the U.S. has entered its first full-fledged bear market in at least a decade. And in truth, nobody really knows how far technology stocks could fall. "The dam has burst and people have decided they won't accept 100 P/E valuations. But where does it stop, at a P/E of 50, or 25 or lower?" wonders John Schofield, technical analyst at Prudential-Bache.